Restart of student debt collections expected to trigger more student loan scams
- Under the rules, 15% of Social Security benefits could be used to offset federal student loans that are in default. On the plus side, up to $750 of monthly Social Security benefits are protected.
- Some student debt relief scams are just a shakedown for cash from people who are having trouble paying their bills.
Beginning in June, tens of thousands of student loan borrowers who didn't make payments for quite some time are expected to start seeing less money in their monthly federal benefits checks, like Social Security, as serious debt collection tactics start to unfold.
A 30-day notice already went out in early May to 195,000 student loan borrowers who are in default, notifying them of what's ahead for their Social Security retirement and disability payments if they don't take action, according to the U.S. Department of Education.
Under the rules, 15% of Social Security benefits each month could be used to offset federal student loans that are in default. On the plus side, up to $750 of monthly Social Security benefits are protected from the offset.
For most federal student loans, you are considered in default if you have not made a payment in more than 270 days, or roughly nine months. And the numbers in default are expected to grow this year and early next year now that the COVID-19-pandemic-related student loan relief is over.
We're going to be hearing more about the federal government's renewed response now to collecting unpaid federal student loan debt that's in default. Money from a borrower's tax refund and wages could be taken to cover months of unpaid student loan debt, too.
Later this summer, about 5.3 million borrowers who were in default before the pandemic began in 2020 are expected to receive a notice from U.S. Treasury that their earnings will be subject to administrative wage garnishment.
The Education Department can require employers to send it up to 15% of a borrower's disposable pay to repay the defaulted loans. Disposable income is calculated after taxes and other legal obligations.
Not surprisingly, consumers who face this kind of financial calamity should be on high alert for someone else to reach out with an unsolicited text, email or phone call, too. You can expect to hear from a scammer anytime soon.
"Every time there is a major event in the student loan system, there are the same kind of fly-by-night, boiler-room scams that robo-dial borrowers," said Mike Pierce, executive director of the Student Borrower Protection Center, an advocacy group based in Washington, D.C.
What kind of scams lurk ahead?
Some scams, Pierce said, are just a shakedown for cash from people who are having trouble paying their bills. The crooks use information from lead generators to pinpoint vulnerable borrowers who already are seeing their credit decline because they aren't paying their student loan bills.
These scammers want to charge you very high upfront fees by offering claims that they can get borrowers a lower monthly payment or get them access to debt cancellation.
"They will take that fee, and they will never have delivered anything of value to you," Pierce said.
A giant red flag: someone who asks you for a fee upfront to handle a problem with your student loans.
The Better Business Bureau is warning student loan borrowers to be aware of student loan debt programs asking you to pay a big upfront fee or monthly fees for phony services. "Some of these companies are real, but they pitch their services with false claims and incomplete information," a BBB alert says.
Don't pay a fee for relief that's free
Other scams work by tricking distressed borrowers into paying for something that they could get free, such as signing you up for an income-driven repayment − something you can do to lower your monthly payment by contacting your loan servicer directly or going to StudentAid.gov to sign up yourself.
"Under federal law," Pierce said, "you don't need to pay anybody to access an affordable loan payment."
The Education Department notes that many times outside companies will charge a fee for services that you can take care of yourself by contacting your loan servicer.
"Often, they’re just fraudsters who are after your money," according to a warning from the Education Department.
Services that come at no cost by contacting your servicer directly include changing your repayment plan, finding a way to lower your monthly loan payment, and figuring out how to consolidate multiple federal student loans. There are also ways to postpone making monthly payments while you're in school or unemployed.
And loan servicers can offer options for getting your federal student loans out of default.
Make no mistake, borrowers may need to make repeated calls to their loan servicer to get on track. Pierce said many will need to contact their congressional representative to get the ball rolling if they run into consistent problems. Members of Congress have caseworkers who help constituents who have problems with a federal agency. His group offers tips online for how to ask for help at ProtectBorrowers.org/caseworktool.
Scammers prepare to strike when you're stressed out
Scammers do their homework. They know that debt collection is in the news now. And they take time to gather all sorts of information about people many times before reaching out to try to convince you that they're the real deal.
One sign of any scam: someone who contacts you out of the blue and demands money on the spot, perhaps payment via a bitcoin ATM, money put on gift cards, or transferring money by wire.
Never hand over that money or feel pressured to act immediately. Remember, the Education Department warns, no one can promise immediate and total loan forgiveness or cancellation. "Most government forgiveness programs require many years of qualifying payments and/or employment in certain fields before your loans can be forgiven," the Education Department says.
Unless you initiated the contact, never share personal information over the phone, according to the National Association of Student Financial Aid Administrators.
Protect your FSA ID
Don't share your FSA ID with anybody. Another sign of a scam, Pierce said, is anyone who asks you for your login and password to access your student loan account. No reputable company, he said, would do that.
The Education Department warns that your FSA ID is used to sign legally binding documents electronically. "If a company has access to your FSA ID information, they can make changes to your account without your permission," the Education Department says.
The pitch can sound promising when it isn't
Many consumers don't realize fraudsters go so far as to take out ads online or impersonate reputable brands with fairly decent-looking websites.
Some examples of false student loan pitches include: “Act immediately to qualify for student loan forgiveness before the program is discontinued.”
“Federal student loan programs may change. Please call within 30 days of receiving this notice.”
“Your student loans may qualify for complete discharge. Enrollments are first come, first served.”
Mark Kantrowitz, a student loan expert and author, said one common form of a scam involves someone pretending to be a debt collector and threatening the borrower with arrest or asset seizures if they don't pay the fake debt collector.
Some scammers might be bold enough to demand hundreds of dollars from someone's wages as part of fake wage garnishment claims. But Kantrowitz said it's important for borrowers to understand the federal government would reach out to your employer to garnish your wages if you're in default on your student loans.
As a result, the employer would be sending that money to the government before it even shows up on your paycheck.
"There are also scams that tell the borrower to make the payment to the scam, as opposed to the federal government," Kantrowitz said.
"These scams often ask for the borrower's FSA ID, and they change the mailing address so that the borrower is unaware that the payments haven't been made and their loans are delinquent or even in default."
The Education Department does not have collection agencies right now, experts say. You're dealing with the student loan servicers and the Education Department's Default Resolution Group. Visit myeddebt.ed.gov for information to help resolve defaulted student loans.
There was a 12-month grace period from October 2023 through Sept. 30, 2024, to protect financially vulnerable borrowers who missed making federal student loan payments. No action was taken during that time that resulted in declaring a loan in default.
Many borrowers are already 90 days past due and moving closer to not making payments for 270 days, which would put them in default and put their wages, tax refunds and Social Security benefits at risk, Pierce said.
He recommends that troubled borrowers go to StudentAid.gov to look up their student loan account to better understand their debt.
(This story was updated to fix a typo.)
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.